APPLIED ECONOMICS

WEEK 2/
Introduction to Applied
Economics

• BASIC ECONOMIC PROBLEMS OF

THE COUNTRY
Introduction to Applied Economics

At the end of the week, the students are

expected to:
• State and generalize the Basic Economic
Problems;
• Elucidate the Basic Economic Problems of
the country.
Terms used:

Income, the money that an individual

earned from work or business received.
Income inequality, the gap in income that
exists between the rich and the poor.
Indirect tax, a regressive tax that the poor
people shoulder the burden of paying
higher taxes like the Value Added Tax.
 Basic Economic Problems

The fundamental problem of economics

is to determine the most efficient ways to
allocate the resources. The decision must
be made to transform the different
economic resources into goods and services
to satisfy their need and want.
PROBLEM OF PRODUCTION
1.What to produce?

2.How to produce?

3.For whom to produce?

 What to produce?

Every economy must determine what

goods and services are to be produced
and in what quantities of each, to
produce. In some, the buyers and
producers need to produce in order to
obtain things and exchange the things
they already own. Since society cannot
have everything, they must decide which
goods and services they want now and
which one to give up now.
 What to produce?

• Society must have a way of figuring out the

needs, demands, and tastes of the members
• It must have a system by which goods and
services are ordered according to a ser of
priorities.
 How to produce?
• The company must decide on how to use the
resources to produce goods and services.
• What combinations of resources and
technologies will be used to produce goods
and services at lowest cost?
• The manufacturer may wish to maximize
profits and minimize production costs. They
may combine labor and capital given the
prices of labor and capital and productivity of
those resources.
 For whom to produce?

This question determine the distribution

of goods and services. Goods and services
will be distributed to buyers on the basis of
their ability and willingness to pay its
existing market price the ability to pay the
prices for goods and service depends on the
amount of income that buyers have, along
with the prices of, and tastes and
preferences for various goods and services.
DISTRIBUTION PROBLEM
The other aspect of the economic problem is
distribution. This tries to answer the following questions:
1. How will the goods and services produced by the
economy be divided among the members of the
society?
2. How will the commodities be allocated for the
present and future satisfaction of people?
3. By how much should the owners of productive
resources be compensated?
• The ultimate aim of economics is not to really to
produce but to consume the fruits of a country’s
resources.
• We produced in order to be fed, clothed and
sheltered
• Therefore there should be a system whereby
commodities are allocated among the members of
society in order for them to survive.
• But the distribution problems is not solely
concerned with the provision for present survival
but also with the provision of future goods and
services.
• If a society is to live on , it must make an
allowance for its own growth and survival
• It must allocate a certain portion of its products
for the future use of its members, known as
SAVINGS, it is the part of the production which
is not currently consumed. ( savings is an index to
the level of present sacrifice for future enjoyment).
• If the owners of resources are properly
compensated, they can have their share of the fruits
of production.
• Laborers getting their wages, landowners getting
their rent, and capitalist getting their profits will use
these returns to buy goods and services produced
by the economy.
 According to the Philippine National
Statistics Office, Philippines annual
inflation rate slowed to 1.3% in January
2016 from 1.5% in December, recorded a
Current Account surplus of 88.41US$
Million in September 2015 as reported by
the Bangko Sentral ng Pilipinas but still
need to address different economic
problems to achieve economic growth.
1.Unemployment

2.Poverty

3.Quality of Infrastructure

4.Income Inequality
 Unemployment

According to the Labor Force Survey, the

unemployment rate was 6% in October
2014, and 6.6% in January 2015.
unemployment remains a persistent
problem in the Philippines because of its
increase in population. As reported by the
Bangko Sentral ng Pilipinas, the total
population in Philippines was last recorded
at 102.2 million people in 2015 from 26.3
million in 1960.
The number of people entering the
job market has been greater than the
number of jobs created, the rural-
urban migration increases due to
insufficient employment
opportunities.
Many of the unemployed individuals
are college graduates.
 What can be done to solve
Unemployment Problem?
1. Appropriate economic policies for labor-
intensive industries.
2. Improvement in the educational system of
the country especially in the rural areas.
3. Minimize rural-urban migration by
improving the economic environment in the
rural areas.
4. Provision of more investment opportunities
to encourage local and international
investment like tax incentives.
5. Proper coordination between the government and
the private sector to solve the problem of job
mismatch.
6. Decreasing the retirement age from 65 to 60 for
public sector to give chance to younger generation
to enter the labor market but providing an
attractive well-defined benefit pensions and
retiree health care for retirees.
7. Slowing the population growth. To improve
standard of living of the Filipinos.
 Poverty

As fast growing economy, with 6.3% Gross

Domestic Product for the 4th quarter of 2015,
still there is a decline in the incidence of poverty
in the Philippines. Poverty remained not only an
economic problem but also a social problem of
the country. Increase in population, increase in
the cost of living, unemployment, inequality in
the distribution of income are some of the
reason why a decline in poverty is very slow.
What can be done to solve
the Poverty Problem?
1. Reduce unemployment.
2. Appropriate policy on labor income.
3. Promote economic growth to improve the
standard of living.
4. Provision of unemployment benefits for those
who will be unemployed due to natural and
man-made calamities.
5. Increasing social services like education,
health care and food subsidies to sustainable
poverty reduction.
Quality of Infrastructure

Based on the Global Competitiveness Report

2014-2015 the Philippines ranks 91st out of 144
countries on a World Economic Forum survey of
infrastructure projects. This can be result of low
investment on infrastructure projects. The
budget for infrastructure is consistently below
3% of Gross Domestic Product (GDP) and the
government spending on social infrastructure
for education and health is only 4% of GDP.
 From the economist’s point of view of
poor infrastructure, the 2.2 million
vehicles a day experiencing traffic
congestion cost the country PHP 876
billion a year, or more than $20 billion, in
lost productivity an wasted energy based
on the study conducted by the Japan
International Cooperation Agency that
would cost a serious drain on an economy
of about $250 billion.
 What can be done to
improve the Quality of
Infrastructure?
1. Quality infrastructure increases macro-level
competitiveness and encourages
investments. In order to ease the
infrastructure constraints, the Philippines
need to achieve a gradual increase in
infrastructure investments to at least 5% of
GDP, and an increase in the efficiency of
spending.
2. The government shall implement fiscal
reform program.
3. Continues reform in key sectors-
particularly power, roads and water-to
improve cost recovery, competition, and
institutional credibility, and to sharply
reduce corruption.
4. Improving central oversight of the planning
and coordination of investments.
5. Focus on investments through public-
private partnerships to address key
bottlenecks, and achieve quick gains in
service delivery.
 Major causes of Income
Inequality in the
Philippines
1. Political culture can be considered as
one of the major causes of income
inequality in the Philippines, the
“palakasan” and “utang na loob” that
cannot be avoided especially after
election.
2. Indirect taxes also one of the major
causes of income inequality.
3. Income taxes.
 What can be done to solve
the problem of Income
Inequality?
1. Policies to enforce progressive rates of direct taxation on
income and wealth, especially at the highest levels.
2. Direct money transfers and subsidize food programs for
the urban and rural poor.
3. Direct government policies to keep the price of essential
products low.
4. Reform people’s political culture.
5. Raise the minimum wage.
6. Encourage and expand collective bargaining.
7. Encourage profit sharing.
Philippine Socio-Economic
Development
Socio-Economic Development is the
process of social and economic
development of the people in the
community. Socio-economic
development is measured with
indicators such as Gross Domestic
Product (GDP), life expectancy,
literacy and levels of employment.
Midterm Update Targets of
the Philippines
Development Plan
a. Economic Development, the process of
improving the standard of living of every
individual.
b. Social Development, interventions that
will directly reduce poverty in its
multiple dimensions by increasing the
poor’s access to social services and basic
facilities.